Healthcare reform’s impact: Farewell to public hospitals like MetroHealth

The future of public hospitals throughout the United States is imperiled, and for a preview on the impact of U.S. healthcare reform on hospitals, look no further than Cleveland’s public safety-net hospital, MetroHealth System.

Faced with a raft of financial pressures and unfavorable trends, MetroHealth willlikely have no choice but to essentially be swallowed up by a larger competitor in the coming years. Given MetroHealth’s moves to strengthen its balance sheet, diversify its revenue base and, in turn, make itself a more attractive acquisition target, the hospital has in a sense already begun the process.

While local health systems say otherwise,recent meetings involving Metro’s executives, administrators and top doctors have led staff to conclude the earliest parts of this endgame are already underway.

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In short: MetroHealth adecade from now will bear little resemblance to the MetroHealth of today. At a national level, the takeaway here is the impact of healthcare reform on hospitals will mean the idea of the public hospital will almost certainly be redefined — if not eliminated entirely.

So why is MetroHealth’s future looking so shaky?

It’s no coincidence thatCEO Mark Moran used surprisingly stark language recently when describing the future of MetroHealth and other publicly subsidized hospitals like it. Public hospitals are an “endangered species,” he told the Cuyahoga County Council – the county government that provides the hospital its public subsidy. And looking ahead, Moran called federal healthcare reform a “freight train heading toward us.”

A look at MetroHealth’s long odds suggest Moran wasn’t merely employing a rhetorical flourish. Public hospitals could easily lose patients in a post-healthcare-reform, nearly-everyone-is-insured world. Let’s be realistic: If most Clevelanders had the choice — and health insurance — would they go to Cleveland Clinic or MetroHealth? That perception might be unfair, but it’s probably fair to say it’s pretty widespread.

But even then, of the additional 32 million Americans who will be insured, half of them will receive coverage through Medicaid. And Medicaid pays hospitals at such a lower rate than private insurers that some claim Medicaid pays less than hospitals and doctors spend to provide care. (Cue one of Moran’s favorite healthcare sayings: “If there is no margin, there is no mission.”)

Fewer patients? Probably. Lower-margin patients? Almost certainly. Now add the elimination of the Medicare and Medicaid Disproportionate Share Hospital (DSH) payments that pays hospitals like MetroHealth for its low-income patients. Health reform calls for $21 billion in cuts to Medicare DSH payments over 10 years, and $14 billion in Medicaid DSH cuts between 2014 and 2020.

And who would want to be a public hospital, anyway? MetroHealth’s subsidy from Cuyahoga County accounts for about 5 percent of its patient revenues and exposes Metro to so much public scrutiny that Moran and his cohorts have to be wondering whether it’s worththeheadache. Thirty years ago public dollars covered all of the charity care the hospital provided. This year the subsidy covers only about one-third of the charity care, a MetroHealth spokeswoman said.

Mark Moran

Add a few more factors: an industry-wide shift from inpatient to outpatient care, further stress on state and local budgets, competition from local rivals like University Hospitals and Cleveland Clinic for insured patients, deteriorating facilities, and rising technology and personnel costs that take a toll on its margins (not to mention its mission).

So what willMetro’s future look like?

Entering pure speculation mode, MetroHealth’s future will almost certainlyinvolve an acquisition, strategic partnership or some sort of change in control that would allow the hospital to come under the umbrella of a larger, richer counterpart.

At least one MetroHealth staffer has come out of meetings believing leadership is already moving in this direction. A scenario that came out of one meeting – rebuffed by MetroHealth – would have seen University Hospitals take over MetroHealth in some fashion, the staff member said. UH would get priority over all patients except trauma and geriatrics, which would remain primarily with Metro. But UH would also have right of first refusal of any patient, which it could then send to MetroHealth.

MetroHealth, essentially, would have a future as UH’s triage unit.

The denials couldn’t be stronger from the hospitals on that particular scenario.

“Over the course of time we have had many conversations with many organizations about affiliations and partnerships,” Moran stated in an e-mail. “We pride ourselves on being able to work collaboratively in clinical, teaching and research endeavors with all organizations in our region. The arrangement that you describe is not something we have been presented with or considered in any way and does not sound like it would benefit MetroHealth. We are not in any conversation with any other organization about a change of control of MetroHealth.”

UH spokeswoman Janice Guhl said:“UH did not make an offer to buy Metro.We do talk to them about collaborative opportunities and our door is very open to those.”

“Collaborative opportunities” may be a key phrase here. It’s possible that UH or another hospital could enter a “collaborative” arrangement with Metro, in which the collaborator takes over all of Metro’s specialty services, while leaving primary care and emergency care within Metro’s purview. In such an arrangement, the “collaborating” hospital would essentially be subsidizing Metro’s money-losing operations in exchange for gaining access to all of its more lucrative specialty patients.

But these kinds of scenarios are likely the only future for MetroHealth and other hospital systems like it nationwide. For MetroHealth in particular, UH may be the only option. Other candidates like Kaiser Permanente may take too long to act, and nearby Summa Health System is perceived as cash poor and unable to do a deal. Cleveland Clinic is thought to have no interest.

But all the better to do a deal now before the health reform train smashes into MetroHealth’s balance sheet and the hospital losesbargaining leverage.

If you think about how Moran has been managing Metro in the last several years, it’s comparable to the way a private CEO would streamline a company before acquisition. He’s cut jobs; planned expansion outside of the City of Cleveland to attract a wealthier, suburban customer base; pushed patients away from expensive ER treatments and – as a result – greatly improved the health system’s balance sheet. MetroHealth held $148 million in current, or liquid, assets, at the end of 2010, according to its financial statements. That’s an impressive increase of 49 percent compared to the prior year.

That improved balance sheet is what gives Metro a little leverage now. But it’s easy to imagine that those liquid assets will dwindle as Metro is rundown by the freight train of health reform. The hospital could easily burn through its money a few years after reform goes into effect. Then it will have no margin, no mission and no leverage against cut-throat takeovers.